Exam 2 Study Guide

Macroeconommics
Stock vs Flows
-Flow= Change per unit of time
→ Determines how fast the stock is going up and down
→ GDP is a flow
GDP
-Market value of all goods during a period of time
-Need to pay someone for the good to be counted for GDP
-Caculating GDP= private consumption + gross private investment+ government investment+
government spending+ (exports-imports)
-(exports-imports) is net exports!
Final and Intermediate Goods
-Final goods: have reached their last consumer as a new good
-Intermediate goods: will be used in future parts of production and have not reached a final
consumer
Circular Flow Diagram
-Shown in notes
Income Approach
-Adding all income, costs, etc.
Expenditure Approach
-Y=C+I+G+NX (specified above in GDP section)
Per Capita GDP
-The average
Problems with GDP
→ Nonmarket production
→ Leisure and Job Quality
→ Product Quality and New Goods
→ Economic “bads”
→ Income inequality and poverty
Price level vs inflation
-The overall level of prices in an economy
-Inflation is an increase in price level
Deflation and Disinflation
-Decrease in the price level= deflation
-Decrease in the interest rate= disinflation
Nominal GDP
-GDP calculated using prices from the same time
-2017’s nominal GDP is calculated using 2017 prices
Real GDP
-Nominal GDP adjusted for inflation
-Used to measure the actual growth of production without any distorting effects from inflation
→ Quantity is the thing that raises GDP
GDP Deflator
Nominal GDP/Real GDP * 100
CPI
→ CPI overstates inflation because of improvements in product quality and it dosen’t account for
changes in consumption due to prices
-Market Basket: the set of goods purchased by a typical consumer
Calculting the inflation rate
-New-old/old
Adjusting a nominal figure for inflation
The graph of the business cycle (peak, trough, contraction, expansion)
-The ups and downs of the economy
→ Not a regular cycle!
Categories important for thinking about labor and employment:
→ The entire population
→ The adult (16+) civilization nonindstituionalized population
→ The unemployed
→ The employed
→ The labor force
Labor Force Participation Rate
-What praction of the population can work, are able to work…
Unemployment Rate
-Unemployed/labor force
Kinds of unemployment
-Frictional
→ “Search” employment
-Structural
→ Unemployment caused by a mismatch between worker’s skills and jobs available
-Seasonal
→ Employment in some markets rises and falls on a regular pattern every year
-Cyclical
→ Unemployment caused by the business cycle
Natural Rate of Unemployment
-Unemployment rate during normal/healthy economic times (frictional + structural)
Full Employment
-The employment rate during normal economic times
Potential GDP
-The value of output produced during normal economic times
Costs of Inflation
-The cost of time and effort that people spend combating the effects of inflation; the cost to a
firm resulting in changing their prices
Expected Inflation
Menu Costs
-The cost (in wasted resources) of updating prices due to inflation
Shoeleather Costs
-The cost of being frantic and frustrated running to and from the bank in order to keep your
money from losing value
Unexpected Inflation
-Lenders and borrowers
-Causes people to use resources to shield themselves from inflation
-The costs of unexpected inflation are worse under very high inflation, because higher inflation
tends to be more variable for reasons we do not understand
The Loanable Funds Market
-Graph in notes*
-What is being “bought” and “sold” is money that has been saved
-When there is an increase in loans, credit, and borrowing by consumers and firms, we will see
the demand for loanable funds increase
Fisher’s Equation and Real and Nominal Interest Rates
-Provides the difference between nominal and real interest rates
Nominal interest rate= real interest rate + pi (inflation premium)
The Foreign Exchange Market
-Two ways dollars leave the country
1. Imports
2. Capital outflow
-Two ways dollars enter the country
1. Exports
2. Capital inflow
Appreciation
-When the dollar buys more foreign currency
Depreciation
-When the dolar buys less foreign currency
Exports-Imports= Capital Outflow- Capital Inflow
Trade Deficit and Trade Surplus
-Trade surplus occurs when the value of a country’s exports exceeds that of its imports
-Trade deficit occurs when imports exceed exports
Leakages= injections
-Leakages reduce the flow of income
→ When households and firms save part of their income
-Injections increase the flow of income
→ When households and firms borrow the saving (investment, government spending…)
Three Uses of Money
1. Medium of Exchange
2. Unit of Account
3. Store of value
Liquidity
-The availability of liquid assets (cash on hand or an asset that can be readily converted to cash)
to a market or company
Fiat vs Commodity Money
-Fiat money: incovertible paper money
-Commodity money: money whose value comes from commodity of which it is made
Money Supply: M0, Monetary Base, M1, M2
-Money supply: the total amount of money in circulation or existence in a country
-M0: the most liquid measure of money supply (only includes liquid assets); smallest measure of
money supply
-Monetary Base: the total amount of a currency that is either circulated in the hands of the public
or in the commercial bank depositis held in the central bank reserves
-M1: includes cash (paper and coin) and checking deposits
-M2: includes all elements of M1 but also contains near money (savin deposits, money market
securities, mutual funds, …)
The Federal Reserve
-Three key objectives…
1. Maximizing employment
2. Stabilizing prices
3. Moderating long-term interest rates
Discount Rate
-The minimum interest rate required by the Federal Reserve for lending the other banks
Interest on Reserve Balances Rate
-The rate at which the Federal Reserve Bank pays interest on reserve balances, which are
balances held by DIs at their local Reserve Banks
Federal Funds Rate
Open Market Operations
-Refers to the buying and selling government securities in the open market in order to expand or
extract the amount of money in the banking system
Reserve Requirements
-A central bank regulation employed by most of all the world’s central banks that sets the
minimum fraction of customer deposits and notes that each bank must hold as RESERVES
The Equation of Exchange, both stock and flow versions
-Addresses the relationship between money and price level, and between money and nominal
GDP
→ The equation states M x V= P x Y
→ M= the money supply
→ V= the velocity of money
→ P= the price level
→ Y= real output or real GDP
The Rule of 70
-If something is growing at x% rate per year, it will double in 70/x years
Why Do Economies Grow?
-Healthy economic institutions, secure and well-defined private property rights, rule of law,
competitive markets, stable money/inflation, low trade barriers, …
Velocity Practice Problems
-If the money supply is $50 trillion, the velocity is 2, and the price level is 25, what is the Real
GDP, according to the stock version of the equation of exchange?
-If money supply grows at 11%, velocity grows at 1%, and Real GDP grows at 4%, what is the
inflation rate, according to the flow version of the equation of exchange?